This article will discuss the compounding of contraventions under the FEMA Act.
Introduction to Compounding of Contraventions Under FEMA
The Indian Parliament passed an act called FEMA, the Foreign Exchange Management Act, 1999. Its purpose is to consolidate and amend foreign exchange laws to facilitate external trade and payments and promote the orderly development and maintenance of India’s foreign exchange market.
Section 15 of the Foreign Exchange Management Act (FEMA), 1999 authorises the Reserve Bank of India to compound any violation of Section 13 of the FEMA, 1999, except Section 3(a) contraventions.
Compounding is the voluntary admission of a violation of any of the provisions of the FEMA Act of 1999 or the rules/regulations/notifications/orders/directions, or circulars issued under the Act.
Individuals violate the provisions by admitting their own inaccuracy and requesting compounding to legalise their actions. This avoids the need for legal action and simplifies and expedites the process. The offence must be compounded by such Reserve Bank of India officers as may be authorised in this regard within 180 days of the date of receipt of the application. RBI evaluates each application for compounding of contraventions under FEMA on a case-by-case basis and may impose different penalties depending on the nature and severity of the violation.
Power to Compound by RBI
Any violation of the provisions of the FEMA, 1999 shall be compounded by the following officers acting under the direction and control of the Governor of the RBI.
|Sum Involved in Contravention||Compounding Authority|
|Amount upto ₹10 Lakh||Assistant General Manager of RBI|
|Amount more than ₹10 lakh but less than ₹40 lakh||Deputy General Manager of RBI|
|Amount ₹40 lakh and more but less than ₹100 lakh||General Manager of RBI|
|Amount ₹100 Lakh and more||Chief General Manager of RBI|
No violation shall be compounded unless the amount involved in the breach is quantifiable.
RBI has the authority to compounding of contraventions under FEMA, which includes offenses related to foreign exchange transactions, investments, borrowings, remittances, and other cross-border transactions.
Delegation of Power to Regional and Central Office
The RBI has delegated compounding powers to regional and central offices to alleviate operational issues and improve customer service.
Compounding of the following contraventions are delegated to the central office: FED CO Cell New Delhi
- Contraventions relating to acquisitions and transfer of immovable property in India
- Contraventions relating to acquisitions and transfer of immovable property in outside India
- Contravention relating to establishing a branch office, liaison office or project office in India
- Contraventions of failing under foreign exchange deposit regulations, 2000.
Compounding of the following contraventions is delegated to the regional office.
- Delay in reporting inward remittance received for share issue
- Delay in filing form (FC-GPR) after issuing shares
- Delay in filing the annual return for foreign liabilities and assets (FLA)
- Delay in issuance of shares, refund of share application money after 180 days, and mode of fund receipt
- Infringement of pricing guidelines for share issuance
- Ineligible instruments are issued
- Issue of shares without the consent of RBI or FIPB, wherever required
- Delay in the submission of form FC-TRS of transfer of shares from resident to non-resident or non-resident to resident
- Taking on record share transfer by investee company in the absence of FC-TRS certification.
The Regional Offices in Kochi and Panaji can compound the violations for less than ₹100 Lakh. Compounding shall be handled at Mumbai RO and Thiruvananthapuram RO, respectively, for contraventions of ₹100 Lakh and above in Panaji and Kochi.
Aside from the specific contraventions listed, applications for all other contraventions must be submitted to the Foreign Exchange Department of the Reserve Bank of India in Mumbai.
Application for Compounding
Except for contraventions under Section 3(a), anyone who contravenes any of the provisions/rules/regulations/notifications/directions/orders issued under FEMA, 1999 may apply for compounding along with the prescribed fees of ₹5000 in the form of a demand draft drawn in favour of ‘Reserve Bank of India’. Once the applicant is made aware of the contraventions by the Reserve Bank or the statutory authority, an application can be made. Suo moto application can also be made when the error is discovered.
The application must be submitted in the prescribed format and include contact information such as the applicant’s or his authorised official or representative’s name, telephone or mobile number, and email address. In addition to the application in the prescribed format, the following documents must be provided:
- Details as per Annex II relating to Foreign Direct Investment
- External Commercial Borrowings, Overseas Direct Investment and Branch Office/ Liaison Office
- Copy of Memorandum of Association
- Latest Audited Balance Sheet and an undertaking as per Annex III that they are not under any enquiry/investigation/adjudication by any agency such as the Directorate of Enforcement, CBI, etc., as of the date of application. In addition, an applicant must notify the compounding Authority / RBI if any such proceedings are initiated after applying but on or before the date of issuance of the compounding order.
If the RBI compound application is not filed in the prescribed format, or if the required details, documents/ declarations are missing, or if the application is filed without a demand draft for the application fees, it will be rejected and returned to the applicant. Once the application has been completed in all aspects within the time frame specified, the date of submission will be considered the date of receipt of the application and will be processed accordingly.
Serious contraventions, in other words, contraventions involving money laundering, terror financing, or anything affecting the sovereignty and integrity of the nation, or cases where the applicant fails to pay the sum for which the compounding order was issued within the specified period of time, will be referred directly to the Directorate of Enforcement for further investigation and appropriate action will be taken. Suppose the applicant commits another violation within three years that is similar to the violation for which a compounding order is already issued. In that case, the violation will not be compounded again, and the provisions of FEMA, 1999 will apply. Any violation committed after the three-year period has expired will be considered for compounding. Compounding of contraventions under FEMA by RBI serves as an important tool for enforcing compliance with FEMA regulations and maintaining stability in the foreign exchange market.
Procedure of Compounding
Once the application is received, the RBI will review the documents and submissions on the same basis. In addition, the Compounding Authority may request additional information or records to support the compounding procedure. Contravention is quantified based on the preceding.
The following factors are taken into account when passing the compounding order and determining the quantum of the sum of payment for the violation:
- Amount of unfair advantage gained, if quantifiable, made as a result of a contravention
- Amount of loss caused to any authority or agency or exchequer made as a result of a contravention
- Economic benefits occurring to applicants from delayed compliance or compliance avoided
- Track record of repetitive nature of the contravention
- Contraveners’ conduct in undertaking the transaction and disclosures made in the application and submissions made during the personal hearing.
Contraventions of FEMA 20 that were existing and continuing on November 7, 2017; in other words, the beginning date of the contravention prior to November 7, 2017) will be compounded in accordance with 1(A) above.
|Type of Contravention||Details||Existing Formula|
|Para 9(1)(A), 9(1)(B), part B of FC(GPR),FCTRS(Reg 10) and taking on record FCTRS (Reg 4)||Fixed Amount: ₹10,000 (applied once for each contravention in a compounding application) + Variable Amount as under : Upto ₹10 Lakh : ₹1000 per year. Above ₹10 Lakh & below ₹40 Lakh: ₹2500 per year. Above ₹40 Lakh & below ₹100 Lakh: ₹7000 per year. ₹1-10 Crore: ₹50,000 per year. ₹10-100 Crore: ₹100,000 per year. Above ₹100 Crore: ₹200,000 per year|
|B. FEMA 3||Non Submission of ECB statements|
|C. FEMA 120||Non reporting/Delay in reporting of Acquisition/Set up of Subsidiaries/Changes in Shareholding pattern|
|D. Any other reporting contraventions|
|E. Reporting contraventions by LO/BO/PO||As above, subject to a ceiling of ₹2 Lakhs. In case of Project Office, the amount imposed shall be calculated on 10% of total project cost|
|AAC/APR/FLAR/Share Certificate Delays||In case of non-submission /delayed submission of APR/share certificates (FEMA 120) or AAC (FEMA 22) or FCGPR (B) or FLA Returns -FEMA 20/FEMA20(R)/FEMA 120/FEMA 395||₹10,000 per AAC/APR/FCGPR (B)/FLA Return delayed. Delayed receipt of share certificate – ₹10,000/- per year , the total amount being subject to ceiling of 300% of the amount invested|
|A. Allotments/Refunds||Para 8 of FEMA 20/2000-RB (non-allotment of shares or allotment/refund after the stipulated 180 days|
|B. LO/BO/PO||Other than reporting contraventions||₹30,000/- + given percentage 1st year – 0.30% 1-2 years – 0.35% 2-3 years – 0.40% 3-4 years – 0.45% 4-5 years – 0.50% >5 years – 0.75% (For Project Offices the amount of contravention shall be deemed to be 10% of the cost of project.)|
|All other Contraventions||Includes all contravention of FEMA20(R)/2017/NDIR, 2019/ FEMA 395/2019, except contraventions pertaining to FLA returns and corporate guarantees||₹50,000/- + given percentage 1st year – 0.50% 1-2 years – 0.55% 2-3 years – 0.60% 3-4 years – 0.65% 4-5 years – 0.70% >5 years – 0.75%|
|Issue of Corporate Guarantees||Issuance without UIN/ without permission wherever required/ open ended guarantees or any other contravention related to issue of Corporate Guarantees||₹500,000/- + given percentage 1st year – 0.050% 1-2 years – 0.055% 2-3 years – 0.060% 3-4 years – 0.065% 4-5 years – 0.070% >5 years – 0.075%. In case the contravention includes the issue of guarantees for raising loans which are invested back into India, the amount imposed may be tripled.|
Compounding orders must be submitted in the following format:
|S. No||Name of the Applicant||Details of the Contravention (Provisions of the Act compounded)||Date of Compounding Order||Amount imposed for compounding of Contravention|
The amount specified in order for the contravention must be paid in the form of a demand draft drawn in the name of the Reserve Bank of India within 15 days of the order’s issuance. Once the order is issued, the violator cannot seek to withdraw it or request a review of the order. The RBI issues a certificate stating that the applicant has complied with the orders passed upon the realization of the sum compounded. Suppose the contravener fails to pay the compounded amount. In that case, it will be treated as if he never applied for compounding of contravention and will be referred to the Directorate of Enforcement for appropriate action. Compounding of contraventions under FEMA by RBI provides an opportunity for offenders to rectify their mistakes and regularize their non-compliant actions.